The 30-Year Decline of American Entrepreneurship

America is obsessed with its entrepreneurs, perhaps now more than ever. We seem to worship them, as Malcolm Gladwell has put it, treating men like Steve Jobs, Bill Gates, and Mark Zuckerberg as "our new prophets."

Yet, for all the attention we lavish on successful start-up founders as a culture, the unavoidable truth is that we're becoming less entrepreneurial as an economy. For roughly 30 years, new businesses have made up a steadily shrinking portion of companies in the United States while generating a declining fraction of new jobs.

The reasons why are still unclear. But the change has accelerated since the recession and may be taking a toll on the recovery. Earlier this month, the Hudson Institute published a report noting that brand new companies added 2.34 million jobs in 2010, compared to an average of about 3 million a year dating back to 1977. Since 2009, we've averaged 7.8 start-up jobs per 1000 Americans, compared to 10.8 during the Bush years and 11.2 during the Clinton administration.

The Hudson report suggests that new regulations, such as healthcare reform, and uncertainty about taxes may be discouraging start-ups from hiring. Looking at the long-term trends, though, it seems that the change we're witnessing is much bigger than anything the Obama administration might be responsible for.

When most people hear the phrase "start-up," their minds immediately leap to small tech firms in Silicon Valley vying to become the next Facebook, Square, or Twitter. But those companies actually make up just a small, rarefied strata of new businesses -- one which seems to be doing relatively fine. While they've pulled back from the excesses of the dotcom bubble, venture capitalists are now investing in more than double the number of companies they were in the 1980s, suggesting there are plenty of small, dedicated teams of programmers and engineers out there plotting to take over the Internet (or biotechnology, or energy, or medical devices). Billions of dollars are chasing these elite entrepreneurs, and while it might not hurt to have even more of them, venture investors already fail to recoup their cash on three quarters of their deals, according to one new estimate from Harvard Business School's Shikhar Ghosh. We don't seem to have any lack of risky, cutting-edge new companies.

It's when we look at the full array of new companies, including what most of us just think of as small businesses in industries like construction or retail, that the problem becomes evident. According to the Census Bureau's Business Dynamics Statistics, which track all new firms with paid employees, start-ups made up more than 12 percent of U.S. companies in 1980, as shown in this graph from a Ewing Marion Kauffman Foundation report. Today, they're less than 8 percent. That share declined sharply during the late 80s, late 90s, and late 00's. As the start-up rate has fallen, so has their contribution to employment -- from as high as 4 percent of all jobs in the Reagan era down to 3 percent in 2006 and finally 2 percent today.

Some of the reasons for the decline may be industry specific. Take construction: In 2000, the sector generated more than 61,000 new firms. In 2010, there were around 17,000. In other words, we had a housing bust.

Another factor may be the success of national chains. Each time a mom and pop team opens a new restaurant or grocery store, it's counted as a start-up. When a new Walmart or parent-company-owned McDonald's opens, it's not. Instead, the government considers it an "establishment," which is just a short way of saying either a new business or a new location for an existing business. From 1983 until 2006, the yearly number of new fast food joints, big box stores, and other establishments (shown in Green) grew by about 50 percent, according to Census data. The annual number start-ups (in red) only increased by around 36 percent.*

Over that time, job creation shifted more heavily towards establishments as well. While start-ups steadily generated in the ballpark of three million jobs per year, new establishments went from about four million to around 6 million 2006.

All of this has resulted in an increasingly calm economy. Young businesses tend to either grow up fast and add lots of jobs or flame out quickly and send their employees to the unemployment line. As the U.S. start-up rate has slowed, so has that process of creative destruction. We've been creating fewer and fewer new jobs as a fraction of overall employment. At the same time, we've been losing fewer jobs due to bankruptcies and layoffs. This chart from the University of Maryland economist John Haltiwanger illustrates that gradual mellowing of our job market that was interrupted by the recession.

The problem with a mellow economy is that is that it's a less innovative and efficient economy. As Haltiwanger writes, young companies that manage to survive their start-up phase tend to be more productive than their old, established counterparts. They give the economy a new injection of life, and the fewer that are created, the less of that energy we get. And we were losing that energy well before the recession.

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*The light blue lines traces Bureau of Labor Statistics data on establishments, which shows a similar trend to the census, but finds different precise numbers.

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